Octel Communications Corp.

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Octel Communications Corp.

1001 Murphy Ranch Road
Milpitas, California 95035-7912
(408) 321-2000
Fax: (408) 321-2100

Public Company
Founded: 1982
Employees: 2,393
Sales: $406.2 million
SICs: 3661 Telephone and Telegraph Apparatus

Octel Communications Corp. is the leading manufacturer and provider of voice-mail products and services. The firm has grown enormously during its brief history as the voice-mail market has expanded dramatically.

Octel was founded by Robert Cohen, a product manager for a computerized instrumentation equipment company, and Peter Olson, an engineer. They met in 1981 when Cohen called Olson to fix a problem with a piece of electronic equipment that worked in the lab but not in the field. Cohen was so impressed with Olsons abilities that he suggested they start a company together.

The duo drew up a list of possible areas of specialization in the technology field and settled on voice mail because they thought it a good market niche. At the time, most voice-mail systems were made by giants like International Business Machines, whose products were large, expensive, and unpopular. Some smaller companies existed, but Olson and Cohen felt that they were not geared toward dealing with businesses in a professional manner. Olson and Cohen designed a product to fit this niche. Their business plan called for a voice-mail machine that would cost $10,000 to make and $50,000 to sell. They wanted it to take up no more space than a closet and to be compatible with the top ten telephone systems then being used. Competing voice-mail systems generally worked only with the manufacturers telephone system, and none worked with all 80 PBX systems on the market. So whereas AT&T could sell its voice-mail system only to businesses owning an AT&T phone system, the Octel system could be sold to anybody.

With this business plan, Octel raised about $2 million in venture capital, effectively selling half of the company to various investors in the process. When finished, the firms system took up as much room as a large suitcase and sold for $55,000. A competing system from IBM was the size of a small room and cost $250,000. Despite its small size, the Octel system was powerful; Olson had used advanced microprocessors made by Intel and Zilog and wired them to run in parallel.

After spending another $4 million, Octel had the system ready in early 1984. However, corporate purchasing departments usually took about a year to order new systems, a fact that was overlooked in Octels business plan. By fall of that year the company had sold only about 10 systems. The firm had to cut costs and raise another $7 million in venture capital. By 1985, however, orders for Octels system began arriving. Voice mail was becoming more popular in corporate America, and thanks to its universal compatibility the Octel system sold very well for a first product by a new company.

Voice-mail machines essentially are computers dedicated to the purpose of answering telephones and recording the human voice. Voice-mail systems translate voices into digital information and store it. To keep file sizes small, much of the information is stripped out, which can lead to a tinny quality that some users find objectionable. Also, telephone answering machines were relatively new, and many people were reluctant to leave messages with machines. However, voice mail offered many advantages. Because information is digital, messages can be copied or manipulated like other computer data. Thus an executive can send ten messages simultaneously or forward a message to someone else. Using touch-tone telephones, callers can select from menu options and route their calls without using a human operator. Octels system also offered options such as slowing down or speeding up a message during playback and automatic call-forwarding. Corporations were first beginning to evaluate the benefits of such systems when Octels system came to market, and its low price tag generated interest and orders.

The firm became profitable in 1986, considered a fast takeoff for a start-up technology firm. A 1987 ruling court ruling changed telecommunications regulations to allow the regional Bell telephone companies to begin offering telecommunications services like voice mail. They were, however, not allowed to manufacture their own equipment, and several decided to use Octels equipment in their systems.

Propelled by its sales to the Bells, Octel became the largest manufacturer of voice-mail systems in 1988, just four years after offering its first product. Its sales grew from $19 million in 1986 to $48 million in 1987. The voice-mail market was booming, growing 50 percent a year by some estimates, to reach $270 million in 1987. In February 1988, Octel went public, raising $7 million by selling 15 percent of the company. The firm was looked over carefully by the financial community because it was one of the first high-technology companies to go public after the stock market crash of October 1987. Later that year, in a sign of the growing importance of both Octel and the voice-processing industry, electronics giant Hewlett-Packard bought 10 percent of Octel. Its new link with H-P gave the young company a marketing boost and a quick presence in Europe, where its products were to be sold under the Hewlett-Packard name. It also led to increased integration of Octels products with Hewlett-Packards electronic-mail and computer systems.

At the time, Octel was offering two voice-mail systems: Aspen systems were designed for large businesses and could contain up to 7,500 mailboxes; the VPC 100, for smaller customers, contained up to 100 mailboxes.

In 1990 Cohen resigned as chief executive officer, citing the need to spend more time with his family; he remained on Octels board. Douglas Chance, a 24-year veteran of Hewlett-Packard who had served on Octels board, became CEO. Octel earned $18 million on sales of $160 million for 1990; voice-mail sales for its nearest competitor, AT&T, were $140 million.

With computer technology constantly improving, Octels systems were rapidly becoming more sophisticated, providing the link between employees (who could be at a touch-tone telephone anywhere in the world) and their employers computer systems. Universities were using the firms PowerCall system for student registration. With it, the schools recorded course descriptions for students, who could then check whether a particular class was available and register for it right over the phone. In 1991 Octel introduced a device that attached to voice-processing systems and turned telephones into terminals, allowing users to interact with computers through the number pads on their telephones. The system, called the Voice Information Processing Server, let callers access databases, voice messages, and electronic mail and carried caller data throughout the call so that informationan identification number, for instancedid not have to be reentered.

By 1992 Octel not only held 20 percent of the voice-mail market but had 36 percent of the market for voice-information services (in which telephone service providers buy voice-mail systems, then rent voice-mail services to customers). In fact, Octel was the first company to enter this business, which had exacting standards because of the high volume of calls that were processed and because the systems themselves were attached to equipment located in the central office of a telephone company. The quickly growing cellular telephone market accounted for many of the firms voice information services sales. The firm had installed 6,500 voice-mail machines, many at Fortune 500 companies.

The firm announced plans to introduce a universal mail box, a system that would collect messages from many sources: voice mail from a subscribers business, home, and cellular telephones, as well as paper mail. It would also receive data, like faxes, to be printed out or viewed later.

In late 1992 Octel bought Tigon, Ameritech Corp.s Dallas-based voice messaging subsidiary. Ameritech agreed to buy voice-processing services from Tigon. Octel made Tigon a wholly owned subsidiary and renamed it Octel Network Services. Ameritech had bought Tigon in 1988 but could not operate it at enough of a profit. At the time of Octels purchase, Tigon had large corporate customers in most major U.S. cities, as well as some in Japan, Taiwan, Britain, Australia, and Canada. Because of the purchase, Octel quickly became the worlds largest voice mail outsourcing company. Octel Network Services managed clients voice-mail networks and engaged in disaster recovery, operations management, systems administration, and project management. These operations brought Octel a large source of recurring revenue to help balance the one-time profit of selling a voice-mail system.

Ameritech became one of the most important clients for Octel Network Services, which operated the voice-mail services that Ameritech offered to residential and small-business customers. By 1994 400,000 Ameritech residential customers were using the system, with thousands joining up every month.

In 1993, with the use of faxes proliferating in corporate America, Octel released three products for its Voice Information Processor: Faxagent, Faxbroadcast, and Faxstation. Each consisted of a card and software. The same year, the firm began a joint venture in Israel, hoping to gain access to some of that countrys technical specialists. Also in 1993 Robert Cohen rejoined the firm as president and CEO. Total revenue for the year came to $338.5 million.

Octel saw an opportunity in operating voice-mail systems in developing countries, and by the mid-1990s it had major installations operating in Brazil and China. In these countries millions of customers wanted their own telephones but could not get them; thus many simply bought their own mailbox and checked messages from pay phones. The firm hoped this system would catch on in developing countries and become a major source of revenue.

In early 1994 Octel took over the industrys first voice-mail company when it merged with VMX Inc. in a stock swap valued at about $150 million. Octels first move was to write software allowing the two systems to network and to port VMXworks, a software application, to Octels systems. Several VMX vice-presidents took similar titles in related areas at Octel.

Octel now had the two most popular user interfaces for voice mail. Analysts expected the acquisition to help Octel as voice processing became based less on the telephone and more on the personal computer. The purchase also brought on VMXs Rhet-orex subsidiary, which designed and manufactured voice-processing components.

Octel had an installed base of 37,000 systems including those that came with the VMX deal. With new applications like fax products the firm hoped to capitalize on this market to make secondary sales. Meanwhile, Octel continued to win customers. In 1994 data-processing giant Electronic Data Systems, which had purchased voice-mail systems from Octel in the past, chose to use Octels voice-processing services. The seven-year contract called for Octel to provide facilities management and services for over 100 Octel systems at Electronic Data Systems locations. Octel also signed long-term contracts with Kodak, Blockbuster Entertainment, and Texas Instruments.

In 1994 Octel finished its new corporate headquarters, a five-building complex in Milpitas, California, with 368,000 square feet of space. VMX employees also moved into the space.

With the increasing prevalence of electronic mail and the increasing power of personal computers, the creation of voice-mail products for the personal computer became more important. In 1994 Octel released Visual Mailbox, a software program that allowed users on local area networks to use personal computers to access voice mail and faxes. The computers did not need built-in multimedia support, although the software required users to be on a system using Octels VMX 200/300 voice-mail system. Octel believed that voice mail would likely be provided on local area networks as they became more powerful and considered the moves an important way to prepare for future market changes. In 1995 Octel demonstrated add-ons for Microsofts Exchange messaging server that enabled users to integrate voice, fax, and e-mail. Also in 1995 Bell Atlantic signed a three-year agreement to use Octels OptiMail, which permitted the outsourcing of voice and fax messaging services.

In the mid-1990s Octel was the leading company in its field and many industry analysts believed it was well positioned for future growth. The telecommunications field was constantly evolving, however, and if regional Bell companies were allowed into manufacturing, some of the firms biggest customers might rapidly become competitors.

Principal Subsidiaries

Octel Network Services; VMX Inc.

Further Reading

Bylinsky, Gene, How to Shoulder Aside the Titans, Fortune, May 18, 1992, pp. 87-88.

DiLorenzo, Jim, Octel to Acquire VMX, Telephony, February 7, 1994, pp. 14-16.

Edwards, Mike, Octel Brings Phones, Computers Closer Together with Voice Processing System, Computing Canada, May 9, 1991, pp. 43, 49.

Lee, Paula Munier, Going Public After the Crash, Small Business Reports, October 1989, pp. 32-36.

Octel Communications Corporation, Wallstreet Transcript, July 17, 1989, p. 94, 284.

Octel Communications Names New President and Chief Executive, Wall Street Journal, October 9, 1990, p. ?13.

Pitta, Julie, Panic! Forbes, October 28, 1991, pp. 102-103.

Pollack, Andrew, Hewlett-Packard Sets 10% Purchase of Octel, New York Times, August 12, 1988, p. D4.

Scott M. Lewis